XYZ Company is a reputable manufacturer of various especiallyelectronic items. Jay Carter, a recent MBA graduate, has been hiredby the company in its finance department.
On of the major revenue-producing items manufactured by the XYZis smartphone. The company currently has one smartphone in themarket and sells has been excellent. The smartphone is a uniqueitem in that it comes in a variety of tropical colors and ispreprogrammed to play Jimmy Buffett music. However, as with anyelectronic item, technology changes rapidly, and the currentsmartphone has limited features in comparison with newermodels.
The company can manufacture the new smartphone for $300 each invariable costs. Fixed costs for the operation are estimated to run$5.1 million per year. The estimated sales volume is 64,000,106,000, 87,000, 78,000, and 54,000 unit per year for the next fiveyears, respectively.
The unit price of the new smartphone will be $485. The necessaryequipment can be purchased for $31 million and will be depreciatedon a seven-year MACRS schedule (Use Table A-1 below). It isbelieved the value of the equipment in five years will be $5.5million.
Net working capital for the smartphones will be one time at$5,000,000 at the beginning of the project (time zero). XYZ has a35% corporate tax rate and required return of 12%.
Jay was asked to prepare a report that answer the followingquestions:
- What is the project NPV?
- What is the Project IRR?
- What is the payback period of the project?
- What is profitability index of the project?
- How sensitive is the NPV to change in the price of the newsmartphone (assume that the price goes done to $370)?
- How sensitive is the NPV to change in the quantity sold (assumethat quantity reduce by 10%)?
Part 2- (25 Points)
- What is a break-even (quantity)?
- If the total interest payment be $150,000, what are the degreesof operating and financial leverage?
Assume that the company has the following capital structure:
Debt | $15,000,000 |
Preferred stock | $7,500,000 |
Common stock | $27,500,000 |
What will be the cost of capital ifthe company decide to raise the needed capital proportionally andwith following costs? Please use the following information tocalculate the weighted cost of capital:
- Bond:
A 30-year bond with a face value of$1000 and coupon interest rate of 13% and floatation cost of $20(Tax is 35%)
- Preferred stock:
Face value of $35 that pays dividend$5 and floatation cost of $2
- Common stock:
Market value of $54 with floatationcost of $3.5. Last dividend was $6. The dividend will expect togrow at 7%.
Uses the new cost of capital, calculate the NPV and IRR?
